Stalemate looms as debt talks hit a wall

WASHINGTON - As the nation's debt soared past $15 trillion, congressional Republicans and Democrats approached stalemate Wednesday in a yearlong assault on federal deficits, stymied still by politically charged disagreements over taxes and the future of enormously expensive government benefit programs.

The talks at a standstill, Democratic officials familiar with the work of Congress' debt-reduction supercommittee disclosed they had floated a secret counteroffer late last week to generally accept a Republican framework for a $1.5 trillion compromise, while differing on numerous key details.

Democrats signaled a willingness to cut spending by $876 billion, including $225 billion from Medicare and $50 billion from Medicaid, these officials said, and raise tax revenue by $400 billion, far less than they had earlier demanded.

They also recommended using $700 billion in unspent funds from the wars in Iraq and Afghanistan for a $300 billion jobs program along the lines President Barack Obama wants, plus steps to protect the upper middle class from the alternative tax and extending financing for doctors who treat Medicare patients.

Republicans acknowledged receiving the offer but rejected it for several reasons, including because it would have permitted Bush-era tax cuts to expire. The Democratic revenue package would have eliminated unspecified tax breaks but not reformed the entire tax code.

"This particular conversation was a step backwards because it would lock in the largest tax hike in history -- at least $800 billion -- and then add an additional $400 billion in job-killing tax hikes without pro-growth tax reform, plus more than $300 billion in 'stimulus' spending," said Michael Steel, spokesman for House Speaker John Boehner, R-Ohio.

The supercommittee has until Wednesday to approve legislation that cuts future deficits by at least $1.2 trillion over a decade. Failing that, automatic spending cuts totaling that amount would take effect beginning in 2013. That's a result that lawmakers on both sides of the political divide -- particularly defense hawks -- say they oppose.

Barring a breakthrough, it was unclear how the 12-member supercommittee would mark the end of its existence. In similar circumstances in Congress, opposing sides often decide to stage politically symbolic votes on competing proposals as part of a competition for public opinion.

The supercommittee's deliberations marked the third major round of deficit-cutting negotiations this year of divided government. The supercommittee was set up under legislation passed in August to raise the limit on the government's ability to borrow.

But with just a week before its Thanksgiving deadline and no sign of progress, each side periodically lobbed a political accusation at the other, often an indication that compromise efforts are approaching gridlock.

And leak of the Democratic offer came after Republican press operatives had criticized Democrats all week for not countering a GOP plan in which Republicans for the first time endorsed new tax revenue.

"We need to find out whether our Republican colleagues want to continue to negotiate or whether they've drawn a hard line in the sand," supercommittee Democratic Rep. Chris Van Hollen of Maryland said. "The question is whether they've kind of said 'take it or leave it.' "

"What I've yet to see is a plan that fundamentally solves the problem," Rep. Jeb Hensarling of Texas, the panel's top Republican, told reporters.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee and a member of the panel, was among few to express optimism during the day, telling reporters in his home state in a conference call that the panel is not stalemated and that as recently as Tuesday night he was swapping proposals with Republican colleagues. He said he planned to do more of it the remainder of the week.

"It's where I expected to be. The world is run by deadlines," Baucus said. "We have a deadline of Nov. 23, the day before Thanksgiving, and boy, oh boy, I hope we get there."

The talks turned particularly rocky last week, when Sen. Pat Toomey, R-Pa., presented an offer to several Democrats that envisioned raising almost $300 billion in additional revenue through an overhaul of the tax code that also lowered the top individual tax rate from 35 percent to 28 percent. It would cut the corporate rate as well.

Republicans pointed to the offer as a possible turning point, given the party's long record of opposition to higher taxes.

But Democrats attacked it as a tax cut for the rich in disguise, and the talks seemed to lose momentum.

The secret Democratic counterproposal came from Sen. Patty Murray, D-Wash., according to Democrats, in a meeting on Friday with Hensarling.

In it, Democrats suggested raising $400 billion in additional revenue through eliminating tax breaks by means of an overhaul of the IRS code, and cutting $876 billion in spending.

Unlike Republicans, who wanted to lock in lower tax rates through tax reform as part of a plan to raise $250 billion, Democrats said they would find the additional revenue by eliminating loopholes and other existing tax breaks. They also said they would not extend the Bush-era tax breaks due to expire at the end of 2012.

On spending, Democrats signaled they would accept a GOP proposal to trim Medicare by $225 billion and Medicaid by another $50 billion as part of the $876 billion cut, officials said.

But they omitted other parts of the GOP offer, including a proposal to raise the age of Medicare eligibility from 65 to 67 and a different proposal to slow the rise of annual cost-of-living increases under Social Security.

Hensarling's office had no immediate response, but earlier he said Democratic offers paled in comparison to the size of the debt crisis.

In addition, Democrats suggested using $300 billion in unspent funds from the wars in Iraq and Afghanistan for a jobs program, another $200 billion to protect the middle class from the alternative minimum tax and $200 billion to assure funding for doctors who treat Medicare patients.

In their offer, Democrats said, Republicans had recommended using the war money, targeting $690 billion to offset the impact of the alternative minimum tax and another $19 billion for a short-term extension of Medicare physician payments.

Elsewhere, conservative criticism continued to bubble over last week's GOP break on taxes.

"We're ceding the high ground here," Rep. Patrick McHenry, R-N.C., said. " Raising taxes is a bad deal. I think it's harmful to the economy. I think it is destructive to this nascent economic recovery, and is bad politics as well."